Fostering an Ethical Culture in the Banking Industry
Ludovico Picciotto
Abstract: The aim of the article is to recommend policies to an promote ethical culture in banking. Top-down regulation cannot prescribe specific ethical conduct and is thus bound to be generic and ineffective. Yet, solely relying on voluntary commitments from banks does not ensure an industry-wide cultural change. Therefore, regulators should focus on a certain kind of principle-based policy to create systemic incentives for banks to foster ethical culture.
Post-GFC Efforts to Foster Ethical Culture in the Banking Industry
The lost growth from the Global Financial Crisis (GFC) was equivalent to 1/6 of global GDP in 2008 (Oxenford 2018). It was, in the words of then Fed chairman Ben Bernanke, “the worst financial crisis in global history” (Wolf 2018). Its far-reaching repercussions appeared to represent “the first crisis of the current era of globalization” (Pisani-Ferry & Santos 2009) and the beginning of “a systemic transformation – the end of … neoliberal deregulation” (Cohen 2009).
Although causes of the GFC are not solely limited to the conduct of financial institutions, the overarching criticism against the banking industry, from civil society, like Occupy Wall Street (Brisbane 2011), public regulators, academics and the industry itself, was that bankers behaved unethically. This was partly due to weak regulations and systemic incentives to take reckless risks (Stiglitz 2010). Ethical culture, which influences individual conduct in important ways (Linklater 2019), depends on each bank’s formal and informal institutional structure but can be hindered or encouraged by regulators.
Consequently, the post-GFC reformatory strategy to enhance ethical conduct has two directions: top-down and bottom-up. From the top-down, international and national regulators ‘fix’ the apple barrel by enforcing regulatory frameworks to deter (negative) unethical conduct and foster (positive) an ethical one (Blair & Barbiani 2019). From the bottom-up, banks themselves promote ethical culture, thus obviating the proliferation of bad apples from within (Weiss 2014).
While not possible to have good apples in bad barrels, good barrels do not ensure good apples. An ethically-conducive regulatory framework is necessary yet not sufficient for ethical culture and conduct to emerge, and thus needs to be complemented with internal efforts from banks (Lagarde 2014).
Regulations After GFC
International and national financial regulations did not start with the GFC, although they intensified in its aftermath. Some of the most consequential international regulatory frameworks and organizations established in the last decade are incremental improvements on previous ones. For example, the Financial Stability Board (FSB) and the Basel III agreement indicate an institutional path dependency which affects multilateral efforts in other fields as well. Conversely, important government Acts such as US Dodd-Frank Wall Street Reform and Consumer Protection Act, and the UK’s Financial Services Act reverted the pre-crisis neoliberal, deregulatory trend.
